Amid industrial decline, Japan weighs a reinvention; many cos lost out to Chinese and South Korean challengers

New York Times

Today, the company's second-generation owner, Hiroshi Ogaki, 40, works alone in a quiet, one-room apartment, designing plastic parts on a computer for other makers in Japan and China. "We see lots of bankruptcies, but no new startups," he said. "Japan's manufacturing just seems to keep shrinking and shrinking."

It is a similarly bleak story for many of the small factories that were the loyal foot soldiers of Japan's postwar export machine.

According to METI, the number of manufacturing companies in Japan dropped by a third, to 540,000, in the 10 years up to 2006. The share of manufacturing in Japan's overall economy has also shrunk to 18 percent in 2009 from about 35 percent in the 1970s, according to the Cabinet Office.

By comparison, while the United States is still the world's largest manufacturing country, such industry accounts for just 9 percent of its overall economy.

Some economists, however, call the fears of hollowing out overblown. Takao Nakazawa, a professor of economics at Fukui Prefectural University, says that the decline in factory jobs is actually due to the introduction of new labor-saving technologies, pointing out that the value of all manufactured goods made in Japan has remained almost unchanged from the early 1990s.

"Hollowing out is a myth," Nakazawa said.

Instead, he and others say that what is happening is actually a shift away from televisions and other commodity products that can be churned out more cheaply by mass assembly lines elsewhere in Asia. He said the surviving Japanese companies are moving toward more quality-sensitive products, like industrial robots and high-end bicycle gears, where Japan still enjoys a formidable lead.

This is the new strategy of Panasonic, which is trying to recover from its largest-ever loss last year by closing two of its three plasma display factories here in Amagasaki, a port city next to the much larger city of Osaka. Now, Panasonic says it will outsource a large chunk of its flat-panel production to lower-cost companies elsewhere in Asia, while focusing its own production lines on more profitable products like factory equipment and batteries for electric cars.

"One lesson we learned is we should not try to make every kind of product ourselves," said Atushi Hinoki, a spokesman for Panasonic. "But there are still many things we make well."

Indeed, many economists and officials say that while a continued shrinking of its industrial base is inevitable, Japan would be foolish to relinquish manufacturing to the extent the United States already has. A focus on exports has allowed this resource-poor nation to enjoy the huge trade surpluses, at least until last year, that pay for its imports of energy and food. They say that Japan's surpluses have also given it the luxury of financing its own huge budget deficits.

"Manufacturing is the foundation on which finance and other service industries stand," said Keiichi Konaga, who formulated Japanese industrial policy in the mid-1980s as the top bureaucrat in METI's precursor. "Even the United States is now waking up to this. That's why it bailed out General Motors."